While property, especially buy-to-let, can be an incredibly solid investment; it’s important to know exactly how your property portfolio is going to affect your tax burdens. Owning property to let is not, in terms of taxes, the same as owning the property which you personally occupy. That’s because buy to let property is considered an investment, and as such is subject to other taxes; including capital gains taxes (on sale) and income tax from the rent your tenants pay to you. For those who aren’t experienced in this industry, their property tax burdens can quickly spiral out of control.
However, with proper management, many property owners can see a significant decrease in their tax burdens. This means higher profits on their investments. Here are a few of the basics that savvy property owners know can help them reduce tax obligations.
Allowable expenses are expenses incurred in the course of doing business; these can be offset against the amount of tax the property owner is expected to pay.
One of the best ways to improve your tax situation via allowable expenses is to claim the interest on mortgage payments on buy-to-let properties. There are plans in place to change this in the near future but as of today this is allowable.
Other allowable expenses include arrangement fees incurred when negotiating loans for the properties in question; letting agent costs, and maintenance costs. Additionally, landlords can claim an automatic percentage, currently 10%, for normal “wear and tear.” Council tax, insurance, and utilities (if they are paid by the landlord and not the tenant) are also allowable expenses.
For many owners, especially those with larger portfolios, it often makes sense to start a limited company to hold the properties. This can help reduce tax burdens in several ways.
First, the initial £10,000 of profit is not taxed. Furthermore, as a company, tax rates on profits and gains are considerably lower than taxes on an individual. Finally, depending on the amount of profit that’s accumulating, a company can be used to pay out its profits as dividends to its shareholders. By doing this, you control your personal income (and therefore how much it’s taxed) on a yearly basis, instead of being taxed on total profits.
The most important factor in managing your tax burden, however, is always knowledge and expertise. Educate yourself about the market, and enlist the help of trustworthy property management consultants and others in the industry to make wise decisions.
At Fresh Invest we engage the help of Property Tax specialists; these professionals are on hand to guide you through this difficult process.Back to news